Tax Proposals Now Favoring 2-home Owners

December 1, 1985|By Kenneth R. Harney, Washington Post Writer's Group

WASHINGTON — Owners of second homes and time shares at the beach, ski condos in the mountains and summer lodges on the lake can stop biting their nails about federal tax-reform changes that could cost them big money. They're in better shape than they thought.

Investors, builders, buyers and sellers involved with other forms of American real estate, on the other hand, don't have such luxury. To varying degrees, they're still on the financial firing line on Capitol Hill.

That's the upshot in the wake of preliminary actions taken by the House Ways and Means Committee before heading home for Thanksgiving. Final committee action on the massive tax-reform package isn't likely until early this month. Full House consideration of the bill -- upwards of a week of floor debate and voting -- won't be until mid-December at the earliest.

The second-home decisions by the Ways and Means Committee were perhaps the most sweeping, generous concessions to real estate interests this year by the tax legislators. The committee took President Reagan's proposal to restrict current mortgage-interest deductions for second-home owners and turned it on its head. Ways and Means voted instead to treat all second homes like first homes in terms of mortgage-interest deductions -- that is, to permit write- offs without limit.

The vote was part of a broader agreement within the committee on a wide spectrum of common interest deductions by taxpayers. Under the committee's new plan, consumers could deduct all their annual interest on their first and second homes. They could then deduct ''non-business'' interest up to an amount equal to their ''net-investment income'' during the year plus $20,000.

(Net-investment income is defined in the tax code as stock dividends, interest on bank deposits, bonds, royalties and rents, minus attendant expenses such as brokerage fees. Non-business interest refers to the interest costs on borrowing for all consumer-related purposes, as well as for investments unrelated to a trade or business.)

Under President Reagan's tax-reform plan, non-business interest write-offs would have been limited to no more than $5,000 per year, excluding mortgage interest on a taxpayer's first home.

After intensive lobbying by representatives of resort communities and trade groups that depend heavily on second-home development, the Ways and Means Committee's staff drafted a softer version of the president's plan earlier this fall. It would have allowed non-business interest write-offs up to $20,000 a year, including mortgage interest on second homes. Although that would have spared the majority of vacation homes from new tax bites, real estate lobbyists kept up pressure on the committee and finally got what they wanted: equal treatment for mortgage interest on both first and second residences.

For the nation's estimated 300,000-plus owners of resort time shares, the lobbyists obtained still another surprise concession. The committee decided to exempt interest on up to six weeks' worth of time-share unit purchases from coverage under the non-business interest limits.

If you buy a one-month fractional interest in, say, a luxury condominium in a resort location, your mortgage interest will be treated precisely like interest on a conventional second home.

In still a third surprise concession, the committee tentatively agreed to treat home sites and building lots owned by individuals as second homes for mortgage-interest deduction purposes. The committee's language provides a more generous break than even current law provides, according to tax experts here. While the second-home, land-sales and time-share interests were all smiles, other real estate owners and promoters were licking their wounds.

-- Small-scale and large investors, for example, would see their current l9-year depreciation standard jump to 30 years (except for low-income housing) under one committee vote. Investors also would lose the right to take ''accelerated'' depreciation, again with the sole exception of low-income housing.

-- Home builders effectively lost one of their favorite new financing devices -- ''home-buyer bonds'' -- under another committee vote.

-- Investors and sponsors of highly leveraged real estate partnerships were hit with a double-edged sword: tough new minimum tax provisions designed to limit write-offs, plus coverage under the new $20,000 non-business interest deduction cap.

''It was a bad week for the real estate syndicators,'' said one lobbyist here. ''But the tax war is just starting.''